Educational Articles

Using a Value Line Page: AT&T and Verizon, Dividend Stars of the Dow

J. Susan Ferrara
| January 31, 2014

There’s a lot that makes telecom giants AT&T (T - Free AT&T Stock Report) and Verizon (VZ - Free Verizon Stock Report) among the most attractive of the Dow components. In fact, besides being in the same industry, both blue chips share many similar qualities, rendering them suitable for a range of investment strategies. Perhaps, though, their greatest allure, and what essentially sets them apart from the rest of the elite Dow members, is their high dividend yields.

To be sure, both AT&T and Verizon have a rich and extensive background, which has helped to shape them into the leading telecom heavyweights they are today. (For a more detailed commentary of their history, read our Profile Reports.) Although there are some inherent differences between the two competitors, there are several striking similarities that make them both somewhat equally appealing to investors. For starters, both have exceptional risk profiles, so they’re among the safest and most stable of equities out there. As seen in the Ranks box in the upper left-hand corner of our page, each sports a top-notch Safety rank of 1 (the highest designation in a range of 1 to 5), implying they carry the lowest level of risk among all stocks under Value Line coverage. Within that same section, note that both have a Beta coefficient of well below 1.00 (used as a benchmark to represent the volatility of the general market). T and VZ have Betas of 0.70 and 0.65, respectively, meaning they are considerably less volatile than the general market.

The two telecom blue chips boast superior marks for other indicators, as well, which lend further support to their favorable risk profiles. Notably, if we scan down to the Ratings box (in the right-hand corner of the page), we see that each gets the highest grade of A++ for Financial Strength, thanks largely to the companies’ strong finances. Indeed, both have solid balance sheets, with plenty of cash in the coffers and a manageable level of debt relative to total capital, (found in the Capital Structure and Current Position boxes, and Statistical Array).

And, to no surprise, both AT&T and Verizon score a perfect 100 for Price Stability (located just below Financial Strength). This measure goes hand in hand with the volatility and risk metrics of the stocks. While both get just a mediocre 55 for Price Growth Persistence, (a gauge of the historic tendency of a stock’s persistent price appreciation compared to the average equity), the pair score high for Earnings Predictability—90 for AT&T and 100 for Verizon—suggesting minimal chance for earnings surprises or misses.

From a valuation standpoint, Verizon appears to be a tad pricier than its rival, as evidenced by the Price/Earnings and relative Price/Earnings ratios (Top Label), though the relative P/Es for both telecom issues compare favorably to the median estimated P/E of all stocks under Value Line review, given that the metric is less than 1.00 in either case.

As for year-ahead price performance, or Timeliness (appears in the Ranks box), T and VZ are on par, based on our current online data. Each is ranked 2 (Above Average) on a scale of 1 to 5, with 3 being Average. This indicates that both are likely to outperform the broader market in the next six to 12 months. (Note that T’s rank was upgraded from 3, as displayed in our published report.)

Yet, the most intriguing feature of these issues may arguably be their eye-catching dividend yields (Top Label), which are handily above the Value Line median of all stocks under coverage. In fact, both surpass their blue-chip brethren, in terms of income generation (as of our latest published reports). (Check out The Dogs of the Dow Grab The Crown For 2013 for a more complete discussion of dividend-paying Dow stocks.) AT&T gets top honors as the highest-yielding member of the group, boasting a 5.3% return. Runner-up Verizon is right behind it, with a still-hearty yield of 4.3%. (Remember that yield refers to the expected return from cash distributions on an equity over the coming 12 months, based on recent price.) Notice, too, in the Statistical Array that both equities are expected to generate solid, though more moderate, returns over the 3- to 5-year period, according to the estimated annual yield calculated by the covering analysts Justin Hellman and Kenneth A. Nugent.

Moving over to the Projections box, we observe that while the pair offers similar capital appreciation potential for the coming 3- to 5-year time frame, AT&T has greater total return prospects for the long term, versus its competitor. (As a reminder, Annual Total Return factors in price appreciation potential and current and prospective dividend distributions.) Although both blue chips are excellent choices for the conservative, income-and-growth-minded investor looking for exposure in the telecom area, AT&T, as a package, may actually prove a more rewarding opportunity in the long run.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.